Club Factory halts operations in India

So a few days after India’s banning of 59 Chinese apps, Club Factory has finally decided to ‘temporarily’ suspend its operations in India because of a “force majeur’ event.

All the payment settlements with sellers are on hold. It sent this letter to its tens of thousands of Indian sellers:

Allegedly some insider told media outlets in China that the outstanding amount due to sellers exceeds INR600 million (US$7.98 million); and that due to logistic and other service providers INR1 billion (US$13.29 million).

Tough times

Difficult time, but it is not the first time Club Factory faces policy/regulatory challenges. Last year, it faced issues with Indian customs, which forced it to transition from a cross border player to a more domestic ecommerce platform, onboarding sellers from India.

Just a few months ago, it faced the ‘only essentials’ ecommerce policy during the lock down – most of the goods sold on Club Factory are non essentials.

In fact, in our Momentum Works 2019 predictions for India, compiled in December 2018, we predicted the following:

4. Club Factory officially gets stung by the government; more Chinese ecommerce players enter during the first half of the year

After Club Factory tested the waters of emerging markets such as Southeast Asia and the Middle East this year, it zeroed in on India as its focus market. It then introduced free shipping, no minimum order size, and other features to ramp up its growth. At one point it was shipping more orders than Alibaba-backed Paytm Mall.

At present, China’s cross-border ecommerce players that invest heavily in India include Club Factory, Shein, Global Easy, Ali Express, etc. Chinese fashion, beauty and lifestyle platforms are popular among Indian consumers because of wide product range, pocket-friendly prices, and stylish trends. It is expected that more Chinese players will enter in the first half of 2019.

But the cross-border ecommerce model is still in the gray zone, because the Indian government has banned foreign companies from engaging in integrated retail business in India in order to “protect local SMEs” (that is why Walmart has been lobbying for many years and has been unable to enter India).

Nowadays, Amazon and China’s cross-border ecommerce companies generally adopt the method of using third-party related companies. How the government perceives the legality of this setup may change. There are signs of the government further clamping down with a recent announcement that bars platforms like Amazon and Flipkart from selling products in which they have an equity stake.

There are of course other loopholes that are not covered in the latest requirements. As general elections are approaching, and especially if and when the tide is not looking good for the incumbent, we expect more curbs on these practices by foreign ecommerce players.

In this regard, we feel that the potential challenges faced by Chinese players are greater than that by Walmart and Amazon. After all, the latter two have developed a vast amount of local infrastructure, employed a large pool of locals, and have also given platforms to local sellers.

Circumstances

There are many comments about Club Factory and its founders, whom we believe are very smart and determined. They picked a tough market (for ecommerce) and achieved good initial traction, and beat Alibaba’s Paytm Mall in cross border. And they are adaptable enough with the pivots.

Circumstances are just not in their favour. They tried Middle East and other markets with no success, losing the market of India (completely) will cast serious doubt about the company’s viability.

Fortunately Indian sellers will probably not protest at their Hangzhou headquarters to display banners, as their Chinese suppliers have done earlier this year: